U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

þ		Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended October 2, 2010

o		Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

THORATEC CORPORATION

California		94-2340464
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)
6035 Stoneridge Drive, Pleasanton, California		94588
(Address of principal executive offices)		(Zip Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ

As of October 22, 2010, the registrant had 58,470,009 shares of common stock outstanding.

 

 

THORATEC CORPORATION

TABLE OF CONTENTS

Part I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements			3
Condensed Consolidated Balance Sheets as of October 2, 2010 and January 2, 2010			3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 2, 2010 and October 3, 2009			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 2, 2010 and October 3, 2009			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			39
Part II. Other Information
Item 1A. Risk Factors			41
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds			41
Item 5. Other Information			41
Item 6. Exhibits			42
Signatures			43
Exhibits
EX-2.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Thoratec, the Thoratec logo, Thoralon, HeartMate, and HeartMate II are registered trademarks of Thoratec Corporation, and IVAD is a trademark of Thoratec Corporation.

CentriMag is a registered trademark of Levitronix LLC.

ITC, A-VOX Systems, AVOXimeter, HEMOCHRON, ProTime, ProTime In Rhythm, Surgicutt, Tenderlett, Tenderfoot, and IRMA are registered trademarks of International Technidyne Corporation (“ITC”), Thoratec Corporation’s wholly-owned subsidiary.

PART I. FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THORATEC CORPORATION

		October 2, 2010				January 2, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	50,709			$	27,787
Short-term available-for-sale investments			337,853				279,174
Receivables, net of allowances of $1,242 and $322, respectively			50,003				48,058
Inventories			57,267				44,635
Deferred tax assets			12,567				12,261
Prepaid expenses and other assets			5,063				4,831
Prepaid and other income taxes			12,380				1,234
Assets held for sale			59,880				63,798
Total current assets			585,722				481,778
Property, plant and equipment, net			37,678				37,115
Goodwill			95,015				95,015
Purchased intangible assets, net			90,964				96,876
Long-term available-for-sale investments			21,578				24,634
Other long-term assets			4,041				12,465
Total Assets		$	834,998			$	747,883
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	15,819			$	6,221
Accrued compensation			17,362				17,417
Other accrued liabilities			13,775				12,469
Senior subordinated convertible notes			136,057				—
Liabilities related to assets held for sale			11,824				12,377
Total current liabilities			194,837				48,484
Senior subordinated convertible notes			—				131,929
Long-term deferred tax liability			26,580				31,720
Other			7,849				10,622
Total Liabilities			229,266				222,755
Shareholders’ equity:
Common shares: no par, authorized 100,000; issued and outstanding 58,469 and 57,043 as of October 2, 2010 and January 2, 2010, respectively			—				—
Additional paid-in capital			599,673				557,418
Retained earnings (accumulated deficit)			9,208				(30,321	)
Accumulated other comprehensive loss:
Unrealized loss on investments			(1,239	)			(648	)
Cumulative translation adjustments			(1,910	)			(1,321	)
Total accumulated other comprehensive loss			(3,149	)			(1,969	)
Total Shareholders’ Equity			605,732				525,128
Total Liabilities and Shareholders’ Equity		$	834,998			$	747,883

See notes to unaudited condensed consolidated financial statements.

THORATEC CORPORATION

(unaudited)
(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		October 2,				October 3,				October 2,				October 3,
		2010				2009				2010				2009
Product sales		$	90,996			$	65,114			$	285,366			$	198,965
Cost of product sales			28,621				19,976				90,771				67,027
Gross profit			62,375				45,138				194,595				131,938
Operating expenses:
Selling, general and administrative			21,104				18,283				64,010				62,625
Research and development			12,332				10,605				44,135				31,705
Amortization of purchased intangible assets			2,446				2,359				7,326				7,441
Total operating expenses			35,882				31,247				115,471				101,771
Income from operations			26,493				13,891				79,124				30,167
Other income and (expense):
Interest expense and other			(3,125	)			(3,261	)			(9,280	)			(9,167	)
Interest income and other			1,362				7,060				4,261				9,304
Impairment on investment			(11	)			—				(2,057	)			—
Income before income taxes			24,719				17,690				72,048				30,304
Income tax expense			(9,239	)			(5,914	)			(25,667	)			(9,472	)
Net income from continuing operations			15,480				11,776				46,381				20,832
Net income (loss) from discontinued operations (net of tax)			(1,183	)			1				(3,697	)			(1,595	)
Net income		$	14,297			$	11,777			$	42,684			$	19,237
Net income (loss) per share — Basic:
Continuing operations		$	0.26			$	0.21			$	0.80			$	0.37
Discontinued operations			(0.02	)			—				(0.06	)			(0.03	)
Net income		$	0.24			$	0.21			$	0.74			$	0.34
Net income (loss) per share — Diluted:
Continuing operations		$	0.26			$	0.20			$	0.78			$	0.36
Discontinued operations			(0.02	)			—				(0.06	)			(0.03	)
Net income		$	0.24			$	0.20			$	0.72			$	0.33
Shares used to compute net income (loss) per share(1):
Basic			58,138				56,045				57,473				55,787
Diluted			66,612				57,368				66,216				57,135

See notes to unaudited condensed consolidated financial statements.

THORATEC CORPORATION

(unaudited)
(in thousands)

		Nine Months Ended
		October 2,				October 3,
		2010				2009
Cash flows from continuing operating activities:
Net income from continuing operations		$	46,381			$	20,832
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization			12,309				13,162
Investment premium amortization, net			3,795				2,099
Loss on extinguishment of senior subordinated convertible notes			99				—
Non-cash expenses, net			687				1,836
Non-cash interest expense			7,152				5,816
Mark-to-market adjustment on HeartWare International Inc. (“HeartWare”) conversion option			—				(1,786	)
Fair value conversion option upon termination of HeartWare merger agreement			—				(3,454	)
Impairment on investment			2,057				—
Tax benefit related to stock options			10,343				2,885
Share-based compensation expense			9,624				7,935
Excess tax benefits from share-based compensation			(9,458	)			(2,397	)
Loss on disposal of assets			529				146
Change in net deferred tax liability			(4,027	)			(3,528	)
Changes in assets and liabilities:
Receivables			(3,080	)			(4,754	)
Inventories			(15,939	)			(13,464	)
Prepaid expenses and other assets			(277	)			(5,539	)
Accounts payable and other liabilities			15,028				1,717
Prepaid and other income taxes, net			(13,851	)			1,607
Net cash provided by continuing operating activities			61,372				23,113
Cash flows from continuing investing activities:
Purchases of available-for-sale investments			(398,874	)			(224,817	)
Sales of available-for-sale investments			306,523				97,577
Maturities of available-for-sale investments			32,090				44,773
Loan collections			2,756				—
Restricted cash and cash equivalents			—				(16,000	)
HeartWare loan receivable			—				(4,000	)
Purchases of patents			(1,414	)			—
Purchases of property, plant and equipment			(2,848	)			(7,590	)
Net cash used in continuing investing activities			(61,767	)			(110,057	)
Cash flows from continuing financing activities:
Excess tax benefits from share-based compensation			9,458				2,397
Proceeds from stock option exercises			22,035				6,598
Proceeds from stock issued under employee stock purchase plan			1,884				1,628
Repurchase and retirement of common shares			(4,698	)			(3,255	)
Extinguishment of senior subordinated convertible notes			(5,358	)			—
Net cash provided by continuing financing activities			23,321				7,368
Effect of exchange rate changes on cash and cash equivalents			(4	)			(207	)
Net increase (decrease) in cash and cash equivalents from continuing operations			22,922				(79,783	)
Cash and cash equivalents from continuing operations at beginning of period			27,787				108,388
Cash and cash equivalents from continuing operations at end of period		$	50,709			$	28,605
Cash flows from discontinued operations:
Net cash provided by operating activities		$	2,944			$	2,821
Net cash used in investing activities			(2,488	)			(2,091	)
Net increase in cash from discontinued operations			456				730
Bank overdraft from discontinued operations at beginning of period			(1,326	)			(1,335	)
Bank overdraft from discontinued operations at end of period		$	(870	)		$	(605	)
Supplemental disclosure of consolidated cash flow information:
Cash paid for taxes		$	30,494			$	7,834
Cash paid for interest		$	1,707			$	1,707
Supplemental disclosure of consolidated non-cash investing and financing activities:
Transfers of equipment from inventory		$	3,493			$	1,732
Purchases of property, plant and equipment through accounts payable and accrued liabilities		$	221			$	1,682

See notes to unaudited condensed consolidated financial statements.

THORATEC CORPORATION

1. Operations and Significant Accounting Policies

Basis of Presentation

     The interim unaudited condensed consolidated financial statements of Thoratec Corporation (“we,” “our,” “us,” or the “Company”) have been prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”), without audit, and reflect all adjustments necessary (consisting only of normal recurring adjustments) to present fairly our financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in our annual financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted. The accompanying financial statements should be read in conjunction with our fiscal 2009 consolidated financial statements, and the accompanying notes thereto, filed with the SEC in our Annual Report on Form 10-K (the “2009 Annual Report”). The operating results for any interim period are not necessarily indicative of the results that may be expected for any future period.

     The preparation of our unaudited condensed consolidated financial statements necessarily requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities on the unaudited condensed consolidated balance sheet dates and the reported amounts of revenues and expenses for the periods presented. The actual amounts could differ from those estimated amounts.

     The financial information presented herein includes continuing operations, unless otherwise stated. On April 25, 2010, our board of directors made a decision to sell our wholly-owned subsidiary, International Technidyne Corporation (“ITC”) and expects to complete this sale within the next nine months. As such, as of the second quarter of 2010, ITC met the conditions in Financial Accounting Standards Board (“FASB”) Codification (“ASC”) 360, Property, Plant and Equipment, to be classified as an asset held for sale, and we have elected to present ITC in this manner for all periods presented, as described in Note 15, “Assets Held for Sale.” On November 4, 2010 we sold ITC, as described in Note 17, “Subsequent Event.”

Revenue Recognition and Product Warranty

     We recognize revenue from product sales when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured. Sales to distributors are recorded when title transfers.

     The majority of our products are covered by up to a one-year limited manufacturer’s warranty. Estimated contractual warranty obligations are recorded when related sales are recognized and any additional amounts are recorded when such costs are probable, can be reasonably estimated and are included in “Cost of product sales.” The change in accrued warranty expense from continuing operations, included in “Other accrued liabilities,” is summarized in the following table:

		Three Months Ended								Nine Months Ended
		October 2,				October 3,				October 2,				October 3,
		2010				2009				2010				2009
		(in thousands)
Balance at beginning of period		$	1,747			$	1,196			$	1,706			$	554
Accruals for warranties issued			2,765				994				4,696				2,894
Settlements made			(1,395	)			(488	)			(3,285	)			(1,746	)
Balance at end of period		$	3,117			$	1,702			$	3,117			$	1,702

2. Recently Issued Accounting Standards

     In April 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-17, Revenue Recognition (Topic 605): Milestone Method. ASU No. 2010-17 provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. Under the milestone method of revenue recognition, consideration that is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. ASU No. 2010-17 provides the criteria to be met for a milestone to be considered substantive which includes: (i) performance consideration earned by achieving the milestone be commensurate with either performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from performance to achieve the milestone; and (ii) past performance be reasonable relative to all deliverables and payment terms in the arrangement. ASU No. 2010-17 is effective on a prospective basis for us for milestones achieved on or after January 2, 2011. Earlier application is permitted. We are currently evaluating the application date and the effect of the amended guidance on our unaudited condensed consolidated financial statements.

     In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 amends ASC 820 and includes separate roll forward activity in Level 3 fair value measurements for purchases, sales, issuances and settlements. This amendment is effective after fiscal year 2010. We are currently evaluating the application of this standard on our unaudited condensed consolidated financial statements.

     In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force), which amends ASC 605-25, Revenue Recognition: Multiple-Element Arrangements. ASU No. 2009-13 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how to allocate consideration to each unit of accounting in the arrangement. This ASU replaces all references to fair value as the measurement criteria with the term selling price and establishes a hierarchy for determining the selling price of a deliverable. ASU No. 2009-13 also eliminates the use of the residual value method for determining the allocation of arrangement consideration. Additionally, ASU No. 2009-13 requires expanded disclosures. This ASU will become effective for revenue arrangements entered into or materially modified after our fiscal year 2010. Earlier application is permitted with required transition disclosures based on the period of adoption. We are currently evaluating the application date and the impact of this standard on our unaudited condensed consolidated financial statements.

3. Cash and Cash Equivalents

     Cash and cash equivalents are defined as short-term, highly liquid investments with original maturities of 90 days or less at the date of purchase. The fair value of these investments was determined by using quoted prices for identical investments in active markets.

4. Investments

     Our investment portfolio is comprised of short-term and long-term investments. Investments classified as short-term available-for-sale consist primarily of municipal bonds, corporate bonds, commercial paper and variable demand notes. All investments mature within two years or less from the date of purchase. Investments with maturities beyond one year may be classified as short-term, if they are available and intended for use in current operations, based on their highly liquid nature or due to the frequency with which the interest rate is reset. Investments classified as long-term available-for-sale consist of auction rate securities, whose underlying assets are student loans. In addition, certain of our long-term investments associated with the deferred compensation plan are classified as trading securities and as of October 2, 2010 consists primarily of mutual fund investments.

     Our investments in available-for-sale securities are recorded at estimated fair value on our financial statements, and the temporary differences between cost and estimated fair value are presented as a separate component of accumulated other comprehensive loss.

     As of October 2, 2010, we had unrealized gains before tax from our investment in municipal bonds and corporate bonds of $1.1 million and unrealized losses before tax from our auction rate securities of $3.1 million.

     The aggregate market value, cost basis and gross unrealized gains and losses for available-for-sale investments as of October 2, 2010 and January 2, 2010 by major security type are as follows:

						Gross
		Amortized				unrealized				Fair
		cost				gains (losses)				value
						(in thousands)
October 2, 2010:
Short-term investments:
Municipal bonds		$	265,935			$	840			$	266,775
Variable demand notes			53,930				—				53,930
Corporate bonds			13,905				247				14,152
Commercial paper			2,996				—				2,996
Total		$	336,766			$	1,087			$	337,853
Long-term investments:
Auction rate securities		$	24,700			$	(3,122	)		$	21,578
January 2, 2010:
Short-term investments:
Municipal bonds		$	196,650			$	1,526			$	198,176
Variable demand notes			66,865				—				66,865
Corporate bonds			13,785				348				14,133
Total		$	277,300			$	1,874			$	279,174
Long-term investments:
Auction rate securities		$	27,700			$	(3,066	)		$	24,634

     As of October 2, 2010 we owned approximately $24.7 million face amount of auction rate securities classified as long-term. The assets underlying these investments are student loans backed by the U.S. government under the Federal Family Education Loan Program or by private insurers and are rated between A- and AAA. Historically, these securities have provided liquidity through a Dutch auction process that resets the applicable interest rate periodically every seven to thirty-five days. Beginning in February of 2008, these auctions began to fail. The principal amount of these auction rate securities will not be accessible until future auctions for these securities are successful, a secondary market is established, these securities are called for redemption, or they are paid at maturity.

     As of October 2, 2010 we recorded an estimated cumulative unrealized loss of $3.1 million ($1.9 million, net of tax) related to the temporary impairment of the auction rate securities, which was included in accumulated other comprehensive loss within shareholders’ equity. In addition, our management reviews impairments and credit losses associated with its investments, including auction rate securities, to determine the classification of the impairment as “temporary” or “other-than-temporary” and to bifurcate the credit and non-credit component of any other-than-temporary impairment event. We (i) do not intend to sell any of the auction rate securities prior to maturity at an amount below the original purchase value; (ii) intend to hold the investment to recovery and, based on a more-likely-than-not probability assessment, will not be required to sell the security before recovery; and (iii) deem that it is not probable that we will receive less than 100% of the principal and accrued interest from the issuer. Therefore, 100% of the impairment was charged to other comprehensive loss. Our auction rate securities are classified as long-term valued at $21.6 million using significant unobservable inputs. In the third quarter of 2010 we liquidated $3.0 million of our auction rate securities at par value through a successful auction.

     If the issuers of the auction rate securities are unable to successfully complete future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge to earnings on these investments. It could conceivably take until the final maturity of the underlying notes (up to 30 years) to realize the investments’ carrying value.

     The aggregate value of our corporate owned life insurance policy and mutual fund investments included in our deferred compensation plan as of October 2, 2010 and January 2, 2010 were as follows:

		October 2,				January 2,
		2010				2010
		(in thousands)
Deferred compensation plan		$	3,187			$	2,436

     The investments associated with the deferred compensation plan is included in “Other long-term assets” on our condensed consolidated balance sheets at the cash surrender value of our corporate owned life insurance policies and the fair value of the mutual fund investments. The realized gain before tax from the change in the cash surrender value and the fair value of mutual fund investments for the three months and nine months ended October 2, 2010 of approximately $0.3 million and $0.2 million, respectively, is included in “Interest income and other.”

5. Fair Value Measurements

     ASC 820, Fair Value Measurements and Disclosure, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (“exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, we used various approaches, including market, income and/or cost approaches, and each of these approaches requires certain inputs. Fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us and reflect our assumptions as compared to the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances.

     We fair value our financial and nonfinancial assets and liabilities based on the observability of inputs used in the valuation of such assets and liabilities using the following fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial and nonfinancial assets and liabilities carried or disclosed at fair value were classified and disclosed in one of the following three categories:

Level 1:		Quoted prices in active markets for identical assets or liabilities.
Level 2:		Quoted prices of similar investments in active markets, of similar or identical investments in markets that are not active or model-based valuations for which all significant inputs and value drivers are observable, directly or indirectly.
Level 3:		Inputs that are unobservable and significant to the overall fair value measurement.

Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis

     ASC 820 principally applies to financial assets and liabilities which include short-term investments, auction rate securities, foreign exchange instruments, and certain of our deferred compensation plan assets. These items are marked-to-market at each reporting period. The information in the following paragraphs and tables primarily addresses matters relative to these financial assets and liabilities.

     The following table represents the hierarchy of our financial assets and financial liabilities measured at fair value on a recurring basis:

		October 2, 2010
		Assets and												Significant
		liabilities								Quoted prices in				other				Significant
		at carrying				Total				active markets for				observable				unobservable
		value				fair value				identical assets				inputs				inputs
										(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Short-term investments:
Municipal bonds		$	266,775			$	266,775			$	—			$	266,775			$	—
Variable demand notes			53,930				53,930				—				53,930				—
Corporate bonds			14,152				14,152				—				14,152				—
Commercial paper			2,996				2,996				—				2,996				—
Long-term investments — auction rate securities			21,578				21,578				—				—				21,578
Other long-term assets — deferred compensation plan			2,420				2,420				—				2,420				—
Liabilities
Other accrued liabilities — mark-to-market on foreign exchange instruments (Note 6)			266				266				—				266				—

		January 2, 2010
		Assets and												Significant
		liabilities at								Quoted prices in				other				Significant
		carrying				Total				active markets for				observable				unobservable
		value				fair value				identical assets				inputs				inputs
										(Level 1)				(Level 2)				(Level 3)
		(in thousands)
Assets
Short-term investments:
Municipal bonds		$	198,176			$	198,176			$	—			$	198,176			$	—
Variable demand notes			66,865				66,865				—				66,865				—
Corporate bonds			14,133				14,133				—				14,133				—
Prepaid expenses and other assets — mark- to- market on foreign exchange instruments (Note 6)			8				8				—				8				—
Long-term investments — auction rate securities			24,634				24,634				—				—				24,634
Other long-term assets — deferred compensation plan			2,436				2,436				—				2,436				—

Valuation Techniques

     Financial assets are considered Level 2 when their fair values are determined using inputs that are observable in the market or can be derived principally from or corroborated by observable market data such as pricing for similar securities, recently executed transactions, cash flow models with yield curves, and benchmark securities. Our Level 2 financial assets include short-term investments and certain of our deferred compensation plan securities. In addition, Level 2 financial instruments are valued using standard calculations and models that use readily observable market data as their basis.

     Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, or similar techniques, and at least one significant model assumption or input is unobservable. Level 3 financial assets include certain investment securities, which include the auction rate securities for which there is limited market activity such that the determination of fair value requires significant judgment or estimation. As of October 2, 2010, these securities were valued primarily using broker pricing models that incorporate transaction details such as contractual terms, maturity, timing and amount of expected future cash flows, as well as assumptions about liquidity and credit valuation adjustments of market place participants. For the auction rate securities, inputs consist of the fair value of the auction rate securities and the present value of future cash flows are estimated by discounting future principal and interest payments over a five-year period.

     We review the fair value hierarchy classification on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. We recognize transfers into and out of levels within the fair value hierarchy at the end of the fiscal quarter in which the actual event or change in circumstances that caused the transfer occurs. There were no significant transfers between Level 1 and Level 2 during the three and nine months ended October 2, 2010 or October 3, 2009. When a determination is made to classify an asset or liability within Level 3, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. The following table provides a reconciliation of the beginning and ending balances for the assets and liabilities measured at fair value using significant unobservable inputs (Level 3):

		Auction
		Rate
		Securities
		(in thousands)
Balance at January 2, 2010		$	24,634
Unrealized holding loss on auction rate securities, included in other comprehensive income			(688	)
Balance as of April 3, 2010		$	23,946
Unrealized holding gain on auction rate securities, included in other comprehensive income			220
Balance as of July 3, 2010		$	24,166
Settlement at par			(3,000	)
Unrealized holding gain on auction rate securities, included in other comprehensive income			412
Balance as of October 2, 2010		$	21,578

     We continue to monitor the market for auction rate securities and consider its impact (if any) on the fair value of our investments. If the current market conditions deteriorate further, or the anticipated recovery in fair values does not occur, we may be required to record additional unrealized losses in other comprehensive income or other-than-temporary impairment charges to the condensed consolidated statements of operations in future periods.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

     Non-financial assets such as goodwill, intangible assets, and property, plant, and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. There were no indicators of impairment as of October 2, 2010. Non-financial assets such as purchased intangibles acquired during the nine months ended October 2, 2010, are measured at fair value using Level 3 inputs, which include discounted cash flow methodologies, or similar techniques, when there is limited market activity and the determination of fair value requires significant judgment or estimation. For a detailed discussion, see Note 9, “Goodwill and Purchased Intangible Assets.”

Financial Instruments Disclosed at Fair Value

     Senior subordinated convertible notes measured at fair value on a recurring basis using Level 2 inputs include quoted prices of identical or similar liabilities and are measured at a fair value of $272.9 million and $205.4 million, as of October 2, 2010 and January 2, 2010, respectively. The senior subordinated convertible notes were reclassified to current liabilities during the second quarter of 2010 due to a redemption feature which may require us to repurchase all or a portion of the senior subordinated convertible notes as early as May 16, 2011. For a detailed discussion, see Note 10 “Senior Subordinated Convertible Notes.”

6. Foreign Exchange Instruments

     We utilize foreign currency forward exchange contracts and options to mitigate future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions (primarily assets and liabilities on our U.K. subsidiary’s consolidated balance sheet). We do not use derivative financial instruments for speculative or trading purposes. We routinely hedge our exposure to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. We perform periodic evaluations of the relative credit standings of these financial institutions and limit the amount of credit exposure with any one institution. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency forward contract, we may experience material financial losses.

     The notional amount of foreign currency contracts with a maximum maturity of four months, which do not qualify for hedge accounting, were as follows:

		Notional Amounts
		October 2, 2010				October 3, 2009
		(in thousands)
Purchases		$	—			$	8,816
Sales			15,503				13,900

     Effective January 3, 2010, we changed our functional currency for our U.K subsidiary from U.K pounds to euros. This change did not have a material impact on our condensed consolidated financial statements: however, the change did impact our foreign currency hedging contracts. As of October 2, 2010, we owned forward contracts to sell euros to U.S. dollars with a notional value of €8.0 million, to sell U.S. dollars to euro with a notional value of $3.6 million and to sell U.K. pounds to euros with a notional value of £0.6 million, as compared to October 3, 2009, when we owned forward contracts to sell euros to U.S dollars with a notional value of €9.6 million and to purchase U.K. pounds from U.S. dollars with a notional value of £5.5 million. As of October 2, 2010, our forward contracts had an average exchange rate of one U.S. dollar to 1.34796 euros and one U.K. pound to 1.15048 euros. The fair value of these contracts was $0.3 million and is included in “Other accrued liabilities” in our condensed consolidated balance sheets.

     The following represents our realized fair value of the foreign currency contracts and offsets to the foreign currency exchange gains and losses which were included in “Interest income and other” in the condensed consolidated statements of operations:

		Three Months Ended								Nine Months Ended
		October 2, 2010				October 3, 2009				October 2, 2010				October 3, 2009
		(in thousands)
Foreign currency exchange (loss) gain on foreign currency contracts		$	(188	)		$	(803	)		$	558			$	132
Foreign currency exchange (loss) gain on foreign currency translation adjustments			(78	)			1,042				(704	)			(406	)

7. Inventories

     Inventories are stated at the lower of cost or market. Cost is based on the first in, first out method and consisted of the following:

		October 2,				January 2,
		2010				2010
		(in thousands)
Finished goods		$	13,141			$	12,920
Work in process			12,532				7,350
Raw materials			31,594				24,365
Total		$	57,267			$	44,635

8. Property, Plant and Equipment, net

     Property, plant and equipment, net, consisted of the following:

		October 2,				January 2,
		2010				2010
		(in thousands)
Land, building and improvements		$	18,478			$	18,134
Equipment and capitalized software			39,922				38,281
Furniture and leasehold improvements			21,511				20,655
Subtotal			79,911				77,070
Less accumulated depreciation			(42,233	)			(39,955	)
Total		$	37,678			$	37,115

9. Goodwill and Purchased Intangible Assets

     The carrying amount of goodwill was $95.0 million as of October 2, 2010 and January 2, 2010.

     In February 2001, we merged with Thermo Cardiosystems, Inc. The components of identifiable intangible assets related to the merger include: patents and trademarks, core technology (Thoralon, our proprietary bio-material), and developed technology (patented technology, other than core technology, acquired in the merger).

     During the first quarter of 2010, we purchased patents at a fair value of $1.4 million, which we capitalized under ASC 350, Intangibles — Goodwill and Other. These patents have an estimated useful life of approximately ten years.

     The purchased intangibles on the condensed consolidated balance sheets are summarized as follows:

		October 2, 2010
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
		(in thousands)
Patents and trademarks		$	40,832			$	(30,408	)		$	10,424
Core technology			37,180				(17,015	)			20,165
Developed technology			121,805				(61,430	)			60,375
Total purchased intangible assets		$	199,817			$	(108,853	)		$	90,964

		January 2, 2010
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
		(in thousands)
Patents and trademarks		$	39,418			$	(29,625	)		$	9,793
Core technology			37,180				(15,558	)			21,622
Developed technology			121,805				(56,344	)			65,461
Total purchased intangible assets		$	198,403			$	(101,527	)		$	96,876

     Amortization expense related to purchased intangible assets for both the three months ended October 2, 2010 and October 3, 2009 was $2.4 million. Amortization expense related to purchased intangible assets for the nine months ended October 2, 2010 and October 3, 2009 was $7.3 million and $7.4 million, respectively. Our amortization expense is expected to be approximately $9.7 million in 2010, declining to $8.7 million by 2014. This decline in amortization expense is due to certain intangibles being fully amortized. Patents and trademarks have useful lives ranging from eight to ten years, and core and developed technology assets have useful lives ranging from zero to eleven years.

10. Senior Subordinated Convertible Notes

     In 2004, we completed the sale of $143.8 million initial principal amount of senior subordinated convertible notes due in 2034. The convertible notes were sold to “Qualified Institutional Buyers” pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 144A thereunder.

     The senior subordinated convertible notes were issued at an issue price of $580.98 per note, which is 58.098% of the principal amount at maturity of the notes. The senior subordinated convertible notes bear interest at a rate of 1.3798% per year on the principal amount at maturity, payable semi-annually in arrears in cash on May 16 and November 16 of each year, from November 16, 2004 until May 16, 2011. Beginning on May 16, 2011, the original issue discount will accrue daily at a rate of 2.375% per year on a semi-annual bond equivalent basis and, on the maturity date, a holder will receive $1,000 per note. As a result, the aggregate principal amount of the outstanding notes at maturity will be $243.4 million.

     Holders of the senior subordinated convertible notes may convert their convertible notes into shares of our common stock at a conversion rate of 29.4652 shares per $1,000 principal amount of senior subordinated convertible notes, which represents a conversion price of $19.72 per share, subject to adjustments upon the occurrence of certain events as set forth in the indenture. Holders have been and are able to convert their convertible notes at any point after the close of business on October 30, 2004 if, as of the last day of the preceding calendar quarter, the closing price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of such preceding calendar quarter is more than 120% of the accreted conversion price per share of our common stock. Commencing October 1, 2008, this market price conversion feature was satisfied, such that holders of the senior subordinated convertible notes may convert their notes through the final maturity date of the notes into shares of our common stock at a conversion rate of 29.4652 shares per $1,000 principal amount of senior subordinated convertible notes, subject to adjustments as provided in the indenture. If holders elect conversion, we may, at our option, deliver shares of common stock, pay a holder in cash, or deliver a combination of shares and cash, as determined pursuant to the terms of the notes. As of October 2, 2010, 4,045 bonds of the 247,427 bonds originally issued had been submitted to be converted and we have elected to pay cash in lieu of shares for these bonds.

     Holders may require us to repurchase all or a portion of their senior subordinated convertible notes on each of May 16, 2011, 2014, 2019, 2024 and 2029 at a repurchase price equal to 100% of the issue price, plus accrued original issue discount, if any. Based on this redemption feature, we reclassified the net carrying amount of the senior subordinated convertible notes to current liabilities during the second quarter of 2010.

     The senior subordinated convertible notes are subordinated to all of our senior indebtedness and structurally subordinated to all indebtedness of our subsidiaries. Therefore, in the event of a bankruptcy, liquidation or dissolution of the Company or one or more of our subsidiaries and acceleration of or payment default on our senior indebtedness, holders of the convertible notes will not receive any payment until holders of any senior indebtedness we may have outstanding have been paid in full.

     In accordance with ASC 470-20, Debt, which applies to certain convertible debt instruments that may be settled in cash or other assets, or partially in cash, upon conversion, we recorded the debt and equity components on the senior subordinated convertible notes separately. This accounting pronouncement increased interest expense associated with our senior subordinated convertible notes by adding a non-cash component to amortize a debt discount calculated based on the difference between the cash coupon rate (2.375% per year) of the senior subordinated convertible notes and the effective interest rate on debt borrowing (9% per year). The discount, which represents the non-cash interest expense, classified as interest expense on the condensed consolidated statements of operations, is being amortized to interest expense over a seven-year period ending May 16, 2011 (the expected life of the liability component) using the effective interest method. Additionally, we allocated transaction costs on the same percentage as the liability and equity component, such that a portion of the deferred debt issuance costs is allocated to the liability component to be amortized using the effective interest method until May 16, 2011, and the equity component to be included in additional paid-in capital.

     Interest expense primarily includes interest and amortization of discount related to senior subordinated convertible notes as follows:

		Three Months Ended								Nine Months Ended
		October 2, 2010				October 3, 2009				October 2, 2010				October 3, 2009
		(in thousands)
Interest expense — cash component		$	840			$	853			$	2,540			$	2,559
Interest expense — non-cash component			2,283				2,099				6,634				6,125

     The debt and equity component (recorded in additional paid-in-capital, net of income tax benefit) consisted of the following:

		October 2, 2010				January 2, 2010
		(in thousands)
Senior subordinated convertible notes
Principal amount		$	141,400			$	143,750
Unamortized discount			(5,343	)			(11,821	)
Net carrying amount		$	136,057			$	131,929
Equity component, net of income tax benefit		$	25,325			$	28,462

     We may redeem either in whole or in part any of the senior subordinated convertible notes at any time beginning May 16, 2011, by giving the holders at least 30 days notice, at a redemption price equal to the sum of the issue price and the accrued original issue discount. If the holders converted the senior subordinated convertible notes into shares of our stock as of October 2, 2010, the as -converted value would be $266.2 million, based on our stock price of $37.12 per share on October 1, 2010, which amount exceeds the original value of the bonds outstanding, or $141.4 million, by $124.8 million. This as-converted value is $22.8 million more than the $243.4 million face amount of the outstanding bonds at maturity in 2034.

     The aggregate fair value of the senior subordinated convertible notes at October 2, 2010 was $272.9 million.

11. Comprehensive Income

     Comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in accumulated other comprehensive income or loss, a component of shareholders’ equity within the condensed consolidated balance sheets, rather than the condensed consolidated statements of operations. Under our existing accounting standards, comprehensive income includes unrecognized gains and losses on investments and currency translation adjustments.

		Three Months Ended								Nine Months Ended
		October 2, 2010				October 3, 2009				October 2, 2010				October 3, 2009
		(in thousands)
Net income from continuing operations		$	15,480			$	11,776			$	46,381			$	20,832
Unrealized gains (losses) on investments (net of taxes of $92 and $112 for the three months ended October 2, 2010 and October 3, 2009, respectively, and $252 and $1,643 for the nine months ended October 2, 2010 and October 3, 2009, respectively)			116				168				(591	)			2,465
Foreign currency translation adjustments			1,157				(405	)			(589	)			871
Comprehensive income from continuing operations			16,753				11,539				45,201				24,168
Comprehensive income (loss) from discontinued operations			(1,183	)			1				(3,697	)			(1,595	)
Comprehensive income		$	15,570			$	11,540			$	41,504			$	22,573

     There are no reconciling items between net loss from discontinued operations and comprehensive loss from discontinued operations.

12. Share-Based Compensation

     Share-based compensation expense is measured based on the grant-date fair value of the share-based awards. We recognize share-based compensation expense for the portion of the award that is expected to vest over the requisite service period for those awards with graded vesting and service conditions. We develop an estimate of the number of share-based awards which will ultimately vest, primarily based on historical experience. The estimated forfeiture rate is re-assessed periodically throughout the requisite service period. Such estimates are revised if they differ materially from actual forfeitures. As required, the forfeiture estimates will be adjusted to reflect actual forfeitures when an award vests.

     Share-based compensation expense and related stock option and restricted stock award activity is presented on a consolidated basis, unless otherwise presented as continuing operations or discontinued operations.

     Share-based compensation included in the condensed consolidated statements of operations consists of the following:

		Three Months Ended								Nine Months Ended
		October 2, 2010				October 3, 2009				October 2, 2010				October 3, 2009
		(in thousands)
Cost of product sales		$	322			$	234			$	947			$	789
Selling, general and administrative			1,858				1,609				6,074				5,153
Research and development			791				594				2,603				1,993
Total share-based compensation expense before taxes			2,971				2,437				9,624				7,935
Tax benefit for share-based compensation expense			948				1,096				3,747				3,054
Total share-based compensation — continuing operations (net of taxes)		$	2,023			$	1,341			$	5,877			$	4,881
Total share-based compensation — discontinued operations (net of taxes)		$	751			$	657			$	1,524			$	1,770

     As of October 2, 2010 and October 3, 2009, share-based compensation expense from continuing operations of $0.3 million and $0.3 million, respectively, was capitalized to inventory. As of both October 2, 2010 and October 3, 2009, share-based compensation expense from discontinued operations of $0.2 million, was capitalized to inventory.

     We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the fair market value of the options at the date of exercise over the exercise prices of the options. Our unaudited condensed consolidated statements of cash flows presentation reports the excess tax benefits (i.e., windfall only for tax deductions in excess of the share-based compensation expense recognized) as financing cash flows of $9.5 million and $2.4 million for the nine months ended October 2, 2010 and October 3, 2009, respectively.

     Cash proceeds from the exercise of stock options were $22.0 million and $6.6 million for the nine months ended October 2, 2010 and October 3, 2009, respectively. Cash proceeds from our employee stock purchase plan were $1.9 million and $1.6 million for the nine months ended October 2, 2010 and October 3, 2009, respectively. The Company purchased $4.7 million and $3.3 million of restricted stock from employees for payment of income tax withholding due upon vesting for the nine months ended October 2, 2010 and October 3, 2009, respectively.

Equity Plan

     In April 2006, the Board of Directors approved the 2006 Incentive Stock Plan (“2006 Plan”) and in May 2006 the 2006 Plan was approved by our shareholders. In May 2006 and April 2008 the 2006 Plan was amended by the Board of Directors and in May 2008 the 2006 Plan as amended was approved by our shareholders. In May 2008 and March 2010, the 2006 Plan was further amended by the Board of Directors and approved by our shareholders in May 2008 and May 2010, respectively. The 2006 Plan allows us to grant to our employees, directors and consultants up to a total of 8.6 million shares of stock awards. Each share issued from May 20, 2008 through May 18, 2010 as restricted stock bonuses, restricted stock units, phantom stock units, performance share bonuses, or performance share units reduces the number of shares available for issuance under the 2006 Plan by one and seventy-four hundredths (1.74) shares, and each share issued as stock options, restricted stock purchases or stock appreciation rights reduced the shares available for issuance under the 2006 Plan on a share-for-share basis. Each share issued from and after May 19, 2010 as restricted stock bonuses, restricted stock units, phantom stock units, performance share bonuses, or performance share units reduces the number of shares available for issuance under the 2006 Plan by one and seven-tenths (1.7) shares, and each share issued as stock options, restricted stock purchases or stock appreciation rights reduces the shares available for issuance under the 2006 Plan on a share-for-share basis. During the nine months ended October 2, 2010, approximately 444,000 options were granted under the 2006 Plan at an exercise price equal to the fair market value on the date of grant, and approximately 684,000 shares of restricted stock and restricted stock units were granted under the 2006 Plan. As of October 2, 2010, approximately 3.8 million shares remained available for grant under the 2006 Plan.

Stock Options

     Upon approval in May 2006, the 2006 Plan replaced our previous common stock option plans and equity incentive plans. As of October 2, 2010, we had 2.9 million options issued and outstanding under the 2006 Plan and the replaced plans. Options under the 2006 Plan may be granted by the Board of Directors at the fair market value on the date of grant and generally become fully exercisable within four years after the grant date and expire between five and ten years from the date of grant. Vesting on some options granted to officers may be accelerated in certain circumstances following a change in control of the Company.

     The fair value of each option is estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

		Three Months Ended								Nine Months Ended
		October 2, 2010				October 3, 2009				October 2, 2010				October 3, 2009
Risk-free interest rate (weighted average)			2.13	%			3.08	%			3.05	%			2.34	%
Expected volatility			40	%			53	%			40	%			53	%
Expected option term (years)			4.83				4.90 to 6.03				4.88 to 6.04				4.91 to 6.02
Dividends		None				None				None				None

     The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options represents the period of time that options are expected to be outstanding. We use separate assumptions for groups of employees (for example, officers) that have similar historical exercise behavior. The range above reflects the expected option impact of these separate groups. We base the expected volatility on a combination of historical volatility trends and market-based implied volatility because we have determined that this combination of historical volatility trends and market-based implied trends are reflective of market conditions.

     As of October 2, 2010, there was $4.2 million of unrecognized compensation expense from continuing operations, net of estimated forfeitures, related to stock options, which expense is expected to be recognized over a weighted average period of 1.40 years. As of October 2, 2010, there was $0.9 million of unrecognized compensation expense from discontinued operations, net of estimated forfeitures, related to stock options, which expense is expected to be recognized over a weighted average period of 1.40 years. The aggregate intrinsic value of in-the-money options outstanding was $49.9 million, based on the closing price of our common stock of $37.12 on October 1, 2010, the last trading day in the nine months ended October 2, 2010. As of October 2, 2010, the aggregate intrinsic value of options currently exercisable was $37.0 million and the intrinsic value of options vested and expected to vest was $49.2 million.

     The total intrinsic value of options exercised for the three months ended October 2, 2010 and October 3, 2009 was $0.4 million and $3.4 million, respectively. The total intrinsic value of options exercised for the nine months ended October 2, 2010 and October 3, 2009 was $32.4 million and $6.0 million, respectively.

     Stock option activity is summarized as follows:

		Number of				Weighted				Weighted Average
		Options				Average Exercise				Remaining Contract
		(in thousands)				Price Per Share				Life (years)
Outstanding options at January 2, 2010			3,857			$	17.29				5.60
Granted			444				30.20
Exercised			(1,377	)			16.00
Forfeited or expired			(34	)			19.73
Outstanding options at October 2, 2010			2,890			$	19.87				5.93
Outstanding options exercisable at October 2, 2010			1,887			$	17.52				4.62
Outstanding options vested at October 2, 2010 and expected to vest			2,733			$	19.49				5.76

     The weighted average grant-date fair value of options granted during the nine months ended October 2, 2010 and October 3, 2009 was $12.62 per share and $12.06 per share, respectively.

Restricted Stock Awards and Units

     The 2006 Plan allows for the issuance of restricted stock awards and restricted stock units, which awards or units may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned share-based compensation related to these awards is being amortized to compensation expense over the period of the restrictions, generally four years. The expense for these awards was determined based on the market price of our shares on the date of grant applied to the total number of shares that were granted.

Restricted Stock Awards

     Share-based compensation expense from continuing operations related to restricted stock awards was $2.3 million for the nine months ended October 2, 2010. As of October 2, 2010, we had $2.1 million of unrecognized compensation expense from continuing operations, net of estimated forfeitures, related to restricted stock awards, which amount is expected to be recognized over 1.05 years. As of October 2, 2010, we had $0.7 million of unrecognized compensation expense from discontinued operations, net of estimated forfeitures, related to restricted stock awards, which amount is expected to be recognized over 1.05 years. There were no restricted stock awards granted during the nine months ended October 2, 2010.

     Restricted stock activity is summarized as follows:

		Number of				Weighted Average
		Shares				Grant Date Fair
		(in thousands)				Value
Outstanding unvested restricted stock at January 2, 2010			609			$	16.63
Granted			—				—
Vested			(270	)			17.15
Forfeited or expired			(20	)			16.10
Outstanding unvested restricted stock at October 2, 2010			319			$	16.24

Restricted Stock Units

     Share-based compensation expense from continuing operations related to restricted stock units was $3.9 million for the nine months ended October 2, 2010. As of October 2, 2010, we had $13.8 million of unrecognized compensation expense from continuing operations, net of estimated forfeitures, related to restricted stock units, which amount is expected to be recognized over 3.03 years. As of October 2, 2010, we had $7.0 million of unrecognized compensation expense from discontinued operations, net of estimated forfeitures, related to restricted stock units, which amount is expected to be recognized over 3.03 years. The aggregate intrinsic value of the units outstanding, based on our stock price on October 2, 2010, was $36.2 million.

     Restricted stock unit activity is summarized as follows:

		Number of				Weighted Average				Weighted Average
		Units				Grant Date Fair				Remaining Contract
		(in thousands)				Value				Life (in years)
Outstanding units at January 2, 2010			463			$	24.17				3.12
Granted			684				31.40
Released			(143	)			25.47
Forfeited or expired			(28	)			26.28
Outstanding units at October 2, 2010			976			$	28.98				3.03

Employee Stock Purchase Plan

     In May 2002, our shareholders approved our Employee Stock Purchase Plan (“ESPP”) under which 500,000 shares of common stock were reserved for issuance. In addition, the ESPP provides for an annual, automatic increase of up to 250,000 shares in the total number of shares available for issuance thereunder on March 1 of each year, unless our Board of Directors specifies a smaller increase or no increase. Under this provision, an additional 250,000 shares were reserved for issuance under the ESPP on each of March 1, 2006, March 1, 2008, and March 1, 2009; our Board of Directors specified no increase as of each other year. Eligible employees may purchase a limited number of shares, over a six-month period, of our common stock at 85% of the lower of the market value on the offering date or the market value on the purchase date. During the nine months ended October 2, 2010, 83,791 shares of common stock were issued under the ESPP. As of October 2, 2010, 215,909 shares remained available for issuance under this plan.

     The estimated subscription date fair value of the current offering under the ESPP is approximately $0.6 million using the Black-Scholes option pricing model and the following assumptions:

Risk-free interest rate			0.25	%
Expected volatility			43	%
Expected option life		0.50 years
Dividends		None

     As of October 2, 2010, there was approximately $71,000 of unrecognized compensation expense from continuing operations and $25,000 of unrecognized expense from discontinued operations related to ESPP subscriptions that began on May 1, 2010, which amount we expect to recognize during the last quarter of 2010.

13. Income Taxes

     Our effective income tax rates from continuing operations for the three months ended October 2, 2010 and October 3, 2009, were 37.4% and 33.4%, respectively. Our effective income tax rates from continuing operations for the nine months ended October 2, 2010 and October 3, 2009 were 35.6% and 31.3%, respectively. The increase in our reported income tax rates was primarily attributable to return-to-provision expense associated with an increase in our effective tax rates due to changes in state apportionment factors and the proportion of tax exempt interest to higher pre-tax earnings. In addition, during the three months ended October 2, 2010, we recorded a return-to-provision benefit primarily associated with additional research credits.

     Further, both of the three-month and nine-month periods in 2010 were affected by federal research tax credits which were available in 2009 but are not currently available in 2010 as a result of the expiration of federal research tax credit legislation.

     We remain under audit by the state of California for the tax years 2003 to 2007, which we have adequately reserved. Subsequent to the third quarter of 2010, we received proposed adjustments from the state of California for the tax years 2005 to 2007, which we are currently evaluating.

     During the next twelve months, it is reasonably possible that audit resolutions and the expiration of statutes of limitation could potentially reduce our unrecognized tax benefits by up to $3.8 million. However, this amount may change because we continue to have ongoing negotiations with various taxing authorities throughout the year.

14. Geographic Information

     Our functional entities operate in two segments: Cardiovascular and ITC. Due to our intent to sell ITC, segment disclosure is no longer presented. For a discussion of our ITC segment, which is classified as discontinued operations, refer to Note 15, “Assets Held for Sale.” Our Cardiovascular segment is classified as continuing operations.

     Our geographic information for our product revenue sold by our continuing operations to the domestic and international markets is discussed below.

     Revenue attributed to a country or region includes product sales to hospitals, physicians and distributors and is based on final destination where the products are sold. During the three and nine months ended October 2, 2010 and October 3, 2009, no customer or international country represented individually greater than 10% of our total product sales. The geographic composition of our product sales from continuing operations was as follows:

		Three Months Ended								Nine Months Ended
		October 2, 2010				October 3, 2009				October 2, 2010				October 3, 2009
						(in thousands)
Domestic		$	76,391			$	51,892			$	238,535			$	159,926
International			14,605				13,222				46,831				39,039
Total product sales from continuing operations		$	90,996			$	65,114			$	285,366			$	198,965

15. Assets Held For Sale

     On April 25, 2010, we entered into a Stock Purchase Agreement to sell the ITC division to Danaher Corporation (“Danaher”) for $110.0 million in cash upon closing. On July 26, 2010, the sale was terminated as a result of the failure of the parties to agree on the status of certain aspects of ITC’s quality system and regulatory filings. We expect to locate another buyer and complete the sale of ITC within the next nine months. As such, the ITC division is classified as held for sale on the condensed consolidated balance sheets as of October 2, 2010 and January 2, 2010 and its results of operations displayed in discontinued operations for all periods presented.

     The results of the ITC business are included in discontinued operations for the three and nine months ended October 2, 2010 and October 3, 2009 as follows:

		Three Months Ended								Nine Months Ended
		October 2,				October 3,				October 2,				October 3,
		2010				2009				2010				2009
						(in thousands)
Product sales		$	22,041			$	22,804			$	68,529			$	70,478
Cost of product sales			14,697				14,209				45,554				43,901
Gross profit			7,344				8,595				22,975				26,577
Operating expenses:
Selling, general and administrative			6,518				5,944				20,697				19,831
Research and development			2,872				2,745				8,968				9,157
Amortization of purchased intangible assets			—				210				269				628
Total operating expenses			9,390				8,899				29,934				29,616
Loss from operations			(2,046	)			(304	)			(6,959	)			(3,039	)
Other income:
Other income			118				75				322				455
Loss before income taxes			(1,928	)			(229	)			(6,637	)			(2,584	)
Income tax benefit			745				230				2,940				989
Net income (loss) from discontinued operations		$	(1,183	)		$	1			$	(3,697	)		$	(1,595	)

     The assets and liabilities of ITC are classified as held for sale as of October 2, 2010 and January 2, 2010. Such amounts are comprised of the following:

		October 2, 2010				January 2, 2010 (1)
		(in thousands)
ASSETS
Current assets:
Receivables, net of allowances of $291 and $522, respectively		$	12,627			$	18,030
Inventories (2)			21,928				22,300
Prepaid expenses and other assets			1,281				881
Total current assets			35,836				41,211
Property, plant and equipment, net (3)			16,468				14,737
Goodwill			4,271				4,271
Purchased intangible assets, net			2,715				2,984
Other long-term assets			590				595
Total assets held for sale		$	59,880			$	63,798
LIABILITIES
Current liabilities:
Bank overdraft		$	870			$	1,326
Accounts payable			2,545				2,310
Accrued compensation			4,493				4,990
Other accrued liabilities			2,428				2,305
Total current liabilities			10,336				10,931
Other long-term liabilities			1,488				1,446
Total liabilities related to assets held for sale		$	11,824			$	12,377

		October 2, 2010				January 2, 2010
		(in thousands)
Finished goods		$	6,414			$	5,083
Work in process			2,478				3,068
Raw materials			13,036				14,149
Total		$	21,928			$	22,300

		October 2, 2010				January 2, 2010
		(in thousands)
Land, building and improvements		$	4,588			$	4,606
Equipment and capitalized software			36,032				35,465
Furniture and leasehold improvements			3,233				3,098
Subtotal			43,853				43,169
Less accumulated depreciation			(27,385	)			(28,432	)
Total		$	16,468			$	14,737

16. Net Income (Loss) Per Share

     On January 4, 2009, we adopted authoritative accounting guidance that requires participating securities to be included in the calculation of the net income (loss) per share using the two-class method. Our restricted share awards subject to repurchase and settlement in shares of common stock upon vesting have non-forfeitable rights to receive dividends on an equal basis with common stock and therefore are considered participating securities. Under the two-class method, basic and diluted net income (loss) per common share is determined by calculating net income (loss) per share for common stock and participating securities based on participation rights in undistributed earnings. Dilutive net income (loss) per common share also considers the dilutive effect of the in-the-money stock options and restricted stock units, calculated using the treasury stock method. Under the treasury stock method, the amount of assumed proceeds from unexercised stock options and restricted stock units includes the amount of unrecognized compensation cost attributable to future services, assumed proceeds from the exercise of the options, and the incremental income tax benefit or liability that would be recorded in additional-paid-in capital when the award becomes deductible.

     Basic and diluted net income (loss) per common share attributable to common shareholders under the two-class method were calculated as follows:

		Three Months Ended								Nine Months Ended
		October 2, 2010				October 3, 2009				October 2, 2010				October 3, 2009
		(in thousands, except per share data)
Basic net income (loss) per share calculation
Net income from continuing operations		$	15,480			$	11,776			$	46,381			$	20,832
Net income from continuing operations allocated to participating securities			(86	)			(133	)			(310	)			(267	)
Net income from continuing operations attributable to common shareholders		$	15,394			$	11,643			$	46,071			$	20,565
Net income (loss) from discontinued operations		$	(1,183	)		$	1			$	(3,697	)		$	(1,595	)
Net income (loss) from discontinued operations allocated to participating securities			7				—				25				20
Net income (loss) from discontinued operations attributable to common shareholders		$	(1,176	)		$	1			$	(3,672	)		$	(1,575	)
Net income		$	14,297			$	11,777			$	42,684			$	19,237
Net income allocated to participating securities			(79	)			(133	)			(285	)			(247	)
Net income attributable to common shareholders		$	14,218			$	11,644			$	42,399			$	18,990
Weighted average number of common shares used to compute basic net income per common share			58,138				56,045				57,473				55,787
Basic net income (loss) per common share from:
Continuing operations		$	0.26			$	0.21			$	0.80			$	0.37
Discontinued operations			(0.02	)			—				(0.06	)			(0.03	)
Total		$	0.24			$	0.21			$	0.74			$	0.34